In the UK, HMRC offers a number of different schemes to businesses to account for and pay their V.A.T. liabilities. The two main schemes are Invoice (or Standard) Accounting and Cash Accounting. Other schemes are essentially variants of one of these two.
Using Invoice Accounting you pay V.A.T. on your sales whether or not your customers have paid you. You also recover V.A.T. on your purchases whether or not you have paid your suppliers.
Using Cash Accounting you pay V.A.T. on your sales only when your customers have paid you. You also recover V.A.T. on your purchases only when you have paid your suppliers.
With Cash Accounting you only have to pay your V.A.T. liability when you have received the money from your customers with which to cover the V.A.T. payment less the V.A.T. element on payments to your suppliers. This can help your business cash flow, especially if you offer good credit terms to your customers.
With Cash Accounting you have automatic bad debt protection on the V.A.T. element of your customer debts. If a customer doesn’t pay you and you have to issue a credit note or write off the debt, with Invoice Accounting you will have already paid the V.A.T. on that customer debt and will only get it back via the credit note in your next V.A.T. return. With Cash Accounting, you won’t have paid the V.A.T. liability as the customer will not have paid you.
Which scheme should you use?
Because of the difference described above, it is nearly always beneficial to use the Cash Accounting scheme if your business is permitted to do so. There are restrictions on which businesses are permitted to use the Cash Accounting scheme for V.A.T. Click on the link below to be taken to the HMRC web site for more details. You should consult your bookkeeper or accountant if you have any doubt.
Configure your system for your chosen scheme
Once you have chosen the scheme that is appropriate for your business, it couldn’t be easier to effect this in your product –
- See V.A.T. Rates & Default V.A.T. Codes for how to do this.
How does it work in Prelude?:
- Invoice accounting VAT returns are based on VATAUDIT
- Cash accounting VAT returns are based on VATCASHAUDIT
- VAT returns for transition between schemes are based on a combination of both tables
o I to C removing transactions that were previously reported under Invoice accounting that have not yet been paid/matched
o C to I adding transactions that were previously not reported under Cash accounting that are still not yet paid/matched
All VATable transactions are always posted to VATAUDIT.
VATable transactions are posted to VATCASHAUDIT only when they are paid/matched
- Nominal payments are always posted to VATCASHAUDIT
- Journal postings to the VAT Control account are always posted to VATCASHAUDIT, but VAT amount only of course, and ideally they should not be used
- Invoices posted as paid are posted to VATCASHAUDIT pro-rata with the payment amount if not paid in full
- Matched invoices/credit notes are posted to VATCASHAUDIT pro-rata with the matching amount
Matching is the trigger for posting ‘credit’ transactions (i.e. invoices and credit notes) to VATCASHAUDIT
- So unmatched customer/supplier invoices/credit notes are not included in the Cash accounting VAT return but unallocated cash will be added as an adjustment to the VAT reports to be included in the return
- Acquisitions from EC will always be treated as invoice accounting and as such are included in both tables
- This in total then meets all the needs of HMRC